New Products Boost McDonald's Profit

The fast-food chain posts an earnings gain of 12% as it sees success with salads and McGriddle breakfast sandwiches.

Resurgent U.S. sales thanks to two new hit products helped McDonald's Corp.'s profit rise 12% in the third quarter -- the latest evidence that the fast-food giant is emerging from a lengthy slump.

The success of entree-sized salads and McGriddle breakfast sandwiches, along with extended hours at thousands of U.S. restaurants, helped McDonald's impress Wall Street on Wednesday with better results than expected.

But the company said it needed to address continuing problems with spotty U.S. service and sluggish sales in Europe, its second-largest market, to keep its turnaround on track.

Chief Executive Jim Cantalupo, who has slowed McDonald's breakneck expansion pace to focus on sales and service at existing restaurants, told analysts more time is needed to achieve the main goal of the company shake-up: sustained, profitable growth.

"We're in the middle of our effort, and if I were bringing home a midterm report card today I'd say we are ahead of where we need to be in the U.S. but we still have a lot of homework to do on the international side of our business," Cantalupo said.

With industry and internal surveys showing McDonald's lagging behind its U.S. competitors in speed and accuracy of handling orders, he acknowledged, "We haven't made as much progress as we need to make on service."

Net income for the quarter was $547.4 million, or 43 cents a share, compared with $486.7 million, or 38 cents, a year earlier. That was 3 cents a share better than the consensus estimate of analysts polled by Thomson First Call.

Revenue climbed 11% to $4.5 billion.

Reversing the trend of recent years, U.S. sales were a strong point, posting an impressive 9.5% jump in restaurants open at least 13 months.

Comparable-store sales rose 3.9% worldwide despite a 0.1% decline in Europe, where sales at established restaurants are down 2% in 2003 compared with the same period last year.

Analyst John Ivankoe of J.P. Morgan Securities Inc. was impressed by a bigger-than-expected increase in U.S. restaurants' profit margins. But he said higher beef costs and lackluster results from Europe could make the turnaround pace difficult to sustain.

McDonald's made a big move to pump up sales by launching its first global marketing campaign last month with ubiquitous TV commercials, many featuring pop star Justin Timberlake singing a jingle for the new slogan, "I'm Lovin' It."

Cantalupo said the ads are connecting with younger customers as well as helping to motivate the 1.5 million, mostly youthful McDonald's employees.

This campaign is "about presenting McDonald's to consumers in a more contemporary, relevant way," Cantalupo said.

Shares of the Oak Brook, Ill.-based company, which have almost doubled since hitting a 10-year low of $12.12 in March, rose 16 cents to $23.90 on the New York Stock Exchange.